Fed to raise rates this month, and then two more times this year – Deutsche Bank

According to Research Team at Deutsche Bank, hawkish rhetoric from several influential Fed policymakers and strong economic data have caused financial markets to dramatically reprice the probability of a March rate hike and they now expect the Fed to raise rates this month, and then two more times this year.

Key Quotes

“The Fed has become less concerned about inflation, as the growth rate of the core PCE deflator (1.7%) is only a tenth below policymaker's yearend 2017 forecast. In terms of the Fed's full employment mandate, the labor market data are sending mixed signals. Importantly, there is also substantial uncertainty about how much of the remaining labor slack is cyclical in nature, and the extent to which the new administration's fiscal stimulus package might expand the productive capacity of the economy.”

“We expect a sharp rise in business spending to lift productivity growth from the doldrums, thus raising wage inflation and perhaps labor force participation, too. The Fed will be keen to let these structural changes play out, instead of short-circuiting the business cycle by rapidly raising rates.”

“Moreover, the resulting increase in potential GDP growth will allow the economy to expand without a meaningful surge in inflation. Therefore, despite the recent improvement in the economic outlook, we do not expect policymakers to abandon their gradualist approach in the near term.”